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Can AI Bots Solve the Agency Remuneration Issue?

21 Mar

Commodorergb1-243x300It was a simpler time in 1864, or so it seems, when the “Commodore,” James Walter Thompson, founded his namesake agency.

As the ad industry grew over the next several decades, a commission based compensation system was the predominant means of remuneration. Simply put, full-service agencies kept 15% of the gross media rate charged by media owners from whom agencies purchased advertising for their clients. At some point in the 1960’s commission based remuneration began to give way to labor-based fees that were predicated on an agency’s direct labor and overhead costs and a reasonable level of profit.

It wasn’t long afterward that the agency “holding company” was born and full-service agencies gave way to agencies that specialized in a particular area such as creative development, media planning and placement and sales promotion. Both of these trends directly impacted “how” and “what” agencies charged clients for their services. As importantly, advertisers became more acutely interested in understanding more finitely the details behind the composition of their agency partners’ fees. This in turn created anxiety and concerns on the part of ad agencies and clients alike. Advertisers sought to reduce the level of fees that they were paying and the agency community sought to protect their profit margins and maintain some level of privacy surrounding their financial operations.

Fast forward to 2017 and the topic of “non-transparent” agency revenue sources such as rebates, kick-backs, float income and media arbitrage has been at the forefront of contract and compensation discussions since the Association of National Advertisers (ANA) completed their landmark “Media Transparency” study in 2016. Rightly or wrongly, many in the industry feel that client procurement tactics, focused on squeezing agency compensation led to the rise in non-transparent revenue. Agencies for their part, feel as though they are overworked and underpaid, while clients continue to sense that they are paying too much for the resources being proffered by their agency partners.

Challenging times to be sure. Add in the shift from traditional media to digital, the attendant impact on workflow and resources, the rise of new competitors to ad agencies that include consultancies, publishers and ad tech providers and the rapidly increasing impact of technology on operational efficiencies and the topic of agency compensation becomes even more vexing.

And while agencies wrestle with their organizational, talent and cultural issues, the industry is poised for a giant leap forward in operational efficiency. Algorithms that can place media and inform resource allocation planning and artificial intelligence bots that can actually create advertiser content and oversee the production of creative materials have the potential to displace agency personnel across multiple functions. The question is: “What is the impact of these technology trends on agency remuneration systems?”

For an industry that has relied on labor-based fees linked to marking-up employee salaries and selling their time to advertisers, the notion of automation and doing more with less can certainly be daunting. As IBM Watson Chief, David Kenny, once said:

“If you are using people to do the work of machines, you are already irrelevant.”

Thus it is time for the ad agency community to rethink both how they organize themselves to deliver client services and how to evolve from labor-based compensation models to outcome based remuneration systems.

Wonder if there is an AI bot that can assist with this transition?

If you’re an advertiser and interested in learning more about how to compensate your ad agency. Contact Cliff Campeau, Principal, AARM | Advertising Audit & Risk Management at ccampeau@aarmusa.com for a complimentary consultation on this important topic.

 

 

 

What is the Right Approach to Agency Compensation?

14 Nov

agency compensationThe topic of effective, mutually beneficial ad agency remuneration methodologies has been discussed ever since the mid-1980’s when full-service agencies and 15% commissions became passé.   

There has been no shortage to the variations on compensation structure that have been explored, adopted and debated over the last thirty years, well before the emergence of procurement in the agency sourcing and contract negotiation mix.  The perception among many industry professionals is that agency compensation is a “zero-sum” proposition… somebody wins and somebody loses.  Further, agency representatives have long alleged that procurement wants one thing, year-over-year rate decreases in spite of the fact that advertisers are asking their agency partners for increasing levels of support. 

Experience has taught all of us who have been participants in constructing agency compensation packages that there is no silver bullet.  The variables which come into play to customize a fair remuneration program which optimizes an advertiser’s return on agency fee investment while properly incenting the agency vary greatly from one relationship to the next.  In our agency contract compliance practice we have reviewed commission only, fee only, base fee plus commission, direct-labor based fees, retainer fees tied to SOWs, flat fees and on and on.  Each has its pros and cons. 

In our opinion, the key to crafting a proper remuneration package comes down to one item, measurement.  It has been said, “If you aren’t measuring, then you are just practicing.”  Time and time again we find that neither the advertiser nor the agency has the requisite inputs to assess and effectively negotiate and or monitor a balanced compensation program.  Ultimately, the way to create a “Win-Win” scenario in this area is for an advertiser to tie agency compensation to agency deliverables.  Unfortunately, advertising is a complex sub-set of the professional services arena and valuing deliverables is a major challenge. 

The good news is that consultants such as Farmer & Company have made inroads in the area of connecting compensation to outputs.  Like most things worthwhile, the initiatives are challenging, but can be tackled.  Farmer & Company takes an in depth, data-driven approach to compile historical project / task level information that many agencies and clients have not maintained.  Why?  They’ve simply never tracked variables such as the effectiveness of the client briefing process, time-on-task, rework levels and or the quality of the outputs.  All are achievable and rewarding, but require a commitment among both client and agency stakeholders to begin capturing this data at the requisite level of detail. 

Recently, I came across an article written for Procurement Leaders by Danny Ertel a partner with Vantage Partners entitled: “Complex Services: Alternative Pricing Models.”  The article addressed the topic of service purchasers achieving their “budgetary concerns with pricing models that do a better job of aligning incentives.”  Importantly, marketers and agencies alike can take solace in the balanced approach proposed by Mr. Ertel for a more “strategic” approach to negotiation, rather than focusing on “trading volume for discounts.”  To quote noted actor and martial artist David Carradine: 

There’s an alternative.  There’s always a third way, and it’s not a combination of the other two ways.  It’s a different way. 

If you’re interested in learning more about balancing risks and outcomes, you will find the article to be thought provoking.  Separately, if you’re interested in discussing how to lay the groundwork for valuing outcomes on this important topic, contact Cliff Campeau, Principal at AARM at ccampeau@aarmusa.com for a complimentary consultation.

There Must Be a Reason Agencies Do What They Do…

14 Oct

deliverables based compensationI just finished reading an excellent AdAge article entitled;How Much Longer Can Agencies Afford to Undersell Themselvesby Syracuse University Associate Professor of Advertising, Brian Sheehan a long-time advertising agency executive which deals with the notion of basing agency remuneration on “deliverable units.”  Of note, I wholeheartedly agree with the Mr. Sheehan’s premise regarding the efficacy of this approach and its ability to strike the requisite creativity/ profitability balance so often referenced in the context of agency compensation discussions.

The core issue, however, is less about the path forward and more about the reasons for agency resistance to this concept, which also serves as the root cause of the challenge with valuing agency delivery… the lack of systematic controls, processes and a disciplined commitment to accurately tracking time-of-staff investment and agency outputs in a timely and transparent manner to enable all parties to correlate agency resource investments to delivery.

Let’s be fair.  No agency ever signed a contract it didn’t choose to.  While client procurement teams may be wired to push for advantageous terms and pricing, agency-side negotiators are no less clever or determined in their approach to insuring their profitability when sitting down at the negotiating table.  The issue isn’t what is negotiated into the letter-of-agreement (LOA), but how (or whether) the agency delivers against the statement of work and or staffing plan agreements.  To be sure, this is necessary for clients to have confidence in the agency’s performance vis-à-vis the LOA.  However, it is even more important to the agency in assessing its return on their resource investment.

As Mr. Sheehan rightly points out, “other” professional services providers, such as management consultants have been able to bridge this gap.  Thus, the issue appears to be rooted in culture rather than a technology or methodology.  Agency holding groups, which represent a disproportionately high share of sector revenues, are publicly traded organizations, run by some of the most astute management and financial executives in the business.  That being said, there must be a reason for agencies “deep aversion to regular tracking of their scope of work” as the author suggests.  This can be evidenced by the fact that there has been little movement to change current charging practices and begin attaching value to agency deliverables. 

Part of the reason, I believe, is that agencies have done an excellent job of integrating technology into their work processes to enhance efficiencies which have boosted outputs per salary dollar invested.  When combined with guaranteed profit levels of between 12% – 15% (which are typical of most LOAs), incremental intercompany revenue yields on core client business, the non-transparent revenue generation opportunities being realized and the agency community’s unquenchable thirst for new business, one might assume that agency bottom-lines aren’t under stress at all. 

With regard to agencies being rewarded for the “value” of their work and or their ability to “completely transform business performance,” how are they any different than other professional services providers such as management consultants?  It can easily be argued that the technological, logistical, financial and marketing strategies which emanate from a management consultant are no less transformative than the creative ideas generated by the advertising community.  Too often we forget that for every “Aflac Duck” success, at the other end of the spectrum, there is a Schlitz beer, a Lisa computer or an Edsel automobile.  Advertisers are the ones who are financing these brands and incurring the risks associated with the marketing and advertising campaigns which support them.  When there are successes, today’s LOAs provide incentive compensation opportunities which reward agencies for their contribution.  And let’s not forget the most important financial reward of all… the opportunity to continue working with an advertiser to insure a future revenue stream.

Agency Charging Practices Questioned

9 Sep

ad agency charging practicesEarlier this week Digiday, a media company serving digital media, marketing and advertising professionals ran an interesting article regarding agency compensation and the “tricks” played by agencies to boost their bottom lines. 

In short, the article asserts that; “For ad agencies, it’s harder than ever to get paid. Their services are becoming increasingly commoditized, and their margins are getting squeezed as a result.”  According to the author, Jack Marshall, this in turn is “driving some to get creative with the ways they bill clients, as they exploit loopholes and tricks in an attempt to maximize their rewards.”  Examples of the bad practices employed by some agencies in this particular area include:

  • Artificially inflating the salaries of their employees when developing compensation programs
  • Double-charging clients by including items such as medical expenses in both salary costs and overhead calculations
  • Slow rolling projects and or throwing more people at a project than is required to boost billable hours

Andrew Teman, one of the agency executives interviewed by Digiday for the article suggested that;

“The problem with big agencies is they don’t make money being efficient; they make money billing more hours.”

For practitioners within advertising industry, the aforementioned revelations are not newsworthy.  Attempts to game the system have been ever present and serve as a reminder of the decades long struggle clients and agencies have had in structuring mutually beneficial agency remuneration programs in a post “15% commission” world. 

Ironically, advertisers and agencies want the same thing… a fair and efficient compensation program which incents extraordinary performance, good behavior among the stakeholders and which leads to a solid client-agency relationship.  To that end, neither party’s needs are being effectively served by the games and subterfuge described in the Digiday article.  The solution to the issue, which seems elusive, is actually rather straightforward: 

  1. Development of detailed scope(s) of work (SOW) to serve as the basis for agency resource investment modeling.  This is an important first step, since it is the SOW which will drive agency staffing and the resulting schedule of charging practices.
  2. Completion of a comprehensive agency staffing plan, with personnel names, titles, functions, utilization percentages and billing rates.
  3. Implementation of an agency remuneration program which aligns the client’s goals with the agency’s resource investment.  Of note, there should be full transparency into the various cost elements used to calculate agency fees, overhead and profit levels.
  4. Reporting and control mechanisms to monitor agency time-of-staff investment, performance and outputs to protect the financial interests of both clients and agencies. 

Unfortunately, as straightforward as the solution may appear, few clients and or agencies have effectively implemented the four steps suggested above at a sufficient level of detail as part of their continuous relationship management processes. 

Some would suggest that the real challenge has been in effectively scoping the work required on behalf of an agency.  According to Michael Farmer, Principal of Farmer & Company which specializes in assisting advertisers and agencies in developing and implementing accurate, effective Scope of Work practices and tools, “New metrics are required to track and measure workloads, prices and resource productivity. That’s the only way agencies can evaluate and negotiate changes in the fees they are paid in today’s marketplace — and halt the erosion in agency operational health.” 

We would suggest that putting in place an effective monitoring program in this area is long overdue at most advertisers.  If not addressed, the institutionalization of the bad behavior referenced in the Digiday article sets a dangerous precedent for treating relationship ailments with trickery rather than frank dialog between clients and agencies.  

 

 

Do You Know if You’re Getting What You Paid For?

1 Jul

How Will Programmatic Media Buying Impact the Role of Agency Media Buyers?

7 Jan

One of the biggest trends in media buying is occurring within the online display advertising segment, the rapid expansion of programmatic buying.  Ironically, few advertisers have delved into the intricacies of this approach and its impact on the stewardship of their media buys.

In short, programmatic buying is the execution of online media buys utilizing quant technology, demand side software interfaces and algorithms to book, analyze and optimize display ad campaigns, often on a real-time basis.  The RTB exchanges, ad exchanges, demand side platforms (DSPs) and sell-side platforms (SSPs) were initially utilized by publishers to move remnant display space.  However, given the success of programmatic media buying, there is a growing push by agencies and ad exchanges to encourage publishers to expose more, if not all of their inventory, including premium inventory with guaranteed impression delivery which is currently sold on a direct basis. 

Why?  The use of programmatic buying yields a number of benefits ranging from enhanced targeting, the ability to select desired rather than bundled impressions, price clarity and enhanced agency control.  Programmatic buying is a more efficient means for agencies to place and manage media buys.  The processes and workflows affiliated with programmatic buying software solutions allow for improved analytics while yielding significant operational efficiencies for ad agencies, chiefly related to time savings.  Furthermore, they can also integrate with other financial and marketing automation platforms which work across paid, owned and earned media channels. 

The concept of selectively targeting users based upon behavior and projected responses to campaign inputs and to dynamically allocate resources based upon near real-time analysis of reams of data tied to a campaign’s objectives is appealing.  Demand side platforms make decisions for an advertiser based upon inventory availability, pricing, placement data, context and other decision making algorithms that align the advertiser’s media plan, budget and campaign KPIs.  Hence, the potential of programmatic buying to enhance the effectiveness of an advertiser’s media investment and to positively impact their return on marketing investment could be substantial.  Thus, it is no surprise that many stakeholders are already talking about the potential expansion of this concept to cover a higher percentage of online media activity and even extending its application to other media types such as television and print. 

The application of new technology that can effectively leverage “Big Data” to make better resource allocation decisions and evolving media marketplaces that dynamically match seller inventory with buyer demand has tremendous potential.  In fact, most would agree that this is a “game changer.”  Who wouldn’t be supportive?  The question to be addressed in the context of programmatic buying is, “What is the impact on the role of media buyers in the placement and stewardship of a client’s media buy?”  Further, how does an advertiser benefit from the realized “operational efficiencies” generated by programmatic buying that currently accrue to the advertising agencies and publishers?  Perhaps more importantly, “How will this automated approach to media buying and stewardship impact the role of agency media buyers?”

Today, marketers pay a premium in the form of agency fees and commissions for digital media buying relative to those paid for traditional media.  If technology is ushering in a more efficient, more automated form of buy management should advertisers be paying more, or less?  For some of the more progressive client organizations, the question may even be, “Should we utilize an agency at all or purchase media directly via electronic exchanges?”  The potential for disintermediation is very real in this context.  The challenge for media agencies will be to redefine the role of their media buying organizations in an evolving media marketplace to clearly identify how and where their buying staffs add value.  It is likely that their future role will be more strategic, giving way to technology to handle the basics of media execution such as the placement, monitoring, analyzing and adjustment of buys.  That being said, there are media buyer generational issues which will require training and development to school agency media buying professionals on emerging programmatic buying platforms and electronic exchanges.  All stakeholders can benefit from the perspective of Bill Gates when it comes to the promise of technological advancement:

“The first rule of any technology used in a business is that automation applied to an efficient operation will magnify the efficiency. The second is that automation applied to an inefficient operation will magnify the inefficiency.”

Exciting times to be sure.  Will there be challenges for clients, agencies, publishers and media workflow and data management system providers?  Absolutely.  But in the end, all have the opportunity to benefit from a rapidly evolving and much needed evolution in the way media buys are executed and optimized. 

Interested in discussing the impact of programmatic buying on your client/agency letter of agreement, staffing plans and remuneration system?  Contact Cliff Campeau, Principal at AARM at ccampeau@aarmusa.com for a complimentary consultation. 

 

Time Keeps Ticking… 3 Common Agency Time-of-Staff Reconciliation Errors

23 Apr

It has been several decades since the move away from full-service agency relationships where advertisers compensated their partners on a straight commission basis, to the use of specialized marketing agencies compensated on a direct labor or fee basis.  However, in spite of the elapsed time, advertisers may still not be optimizing their agency fee investments.

Over the course of our timekeeping system and fee reconciliation audit work we frequently come across vagaries and oversights that hinder an advertiser’s ability to leverage its investment in agency compensation.  This is frequently compounded by the fact that there is little transparency into the accuracy of an agency’s time reporting vis-à-vis its timekeeping system.

The three most common errors that our audits uncover are as follows:

  1. Lack of a proper agency staffing plan incorporated into client-agency agreements.  A proper staffing plan should identify annual full-time equivalent hours, the individual, their position, the pledged utilization level and the billing rate or departmental cost to be utilized to calculate and reconcile agency fees.
  2. While many client-agency agreements set forth processes for monthly time-of-staff reporting and quarterly or annual reconciliation reviews, few advertisers receive and or review these reports or reconcile fees to the agency’s time-of-staff investment.  Further, it is rare that the advertiser has previously conducted an independent third-party review over the accuracy or validity of an agency’s time reporting.
  3. No definitive contractual approach for how an agency will report on and or bill for freelance or independent contract talent.

A lack of clarity and controls in this area results in transparency gaps and billing oversights.  Absent independent verification of agency time reporting, discrepancies are not transparent to the advertiser.  And, absent accurate historical information, the problem is perpetuated when future fee levels are based on inaccurate historical time and cost assumptions.

Clear definition, process and control will mitigate significant economic risks for both the advertiser and agency.  This is also why a comprehensive staffing plan is essential to the fee / time-of-staff reconciliation process.  In the words of William Penn:

“Time is what we want most, but… what we use worst.”

Armed with accurate costing and utilization information, both the Advertiser and Agency will be able to build on their joint efforts in fostering a strong partnership based on a fair underlying compensation structure.

As a complimentary offer, and to talk through agency fee investment best control practices, please contact Don Parsons, Principal at Advertising Audit & Risk Management, at dparsons@aarmusa.com.

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